Notes to the Consolidated Financial Statements (unaudited)
The fair value of long-term debt is determined for disclosure purposes only using an income approach. Fair values are estimated using the present value of future cash flows discounted at the market rate of interest for the equivalent Province of Saskatchewan debt instruments. Notional values are an approximation of future undiscounted net cash flows. For physical natural gas contracts, the notional value is based on the contract price. Where contract prices are referenced to an index price that has not yet been fixed, the market price is used to estimate the contract price.
As at December 31, 2023, natural gas derivative instruments had the following fair values, notional values and maturities:
(millions)
2024
2025
2026
2027
2028
Thereafter
Total
$ $
(19)
Fair value
$ $
(3) (4)
$ $
(16) (39)
$ $
-
$ $
1
$ $
(1)
$ $
-
(109)
Notional value
(29)
(27)
(11)
1
Fair value - increase (decrease) in net income
Notional value - estimated undiscounted net cash (outflow) inflow
6.
FINANCIAL RISK MANAGEMENT
Through the normal course of business, the Corporation has exposure to market risk (natural gas price risk and interest rate risk), liquidity risk, and credit risk related to its financial and derivative instruments. The Board of Directors, through the Audit and Finance Committee, has the overall responsibility for the establishment and oversight of the Corporation’s risk management efforts. The risk management policies and strategies, approved by the Board of Directors and reviewed regularly by the Audit and Finance Committee, provide the framework within which financial and derivative instruments may be used to manage the Corporation’s risks. The Corporation’s significant risk management policies include the Corporate Derivatives Policy, the Commodity Risk Management Policy, the Corporate Debt and Interest Rate Risk Management Policy, and the Corporate Credit Risk Management Policy. The objectives, policies and processes for managing risk were consistent with the prior period.
a.
Natural gas price risk
The Corporation purchases natural gas for resale to its customers. While natural gas is purchased at fluctuating market prices, the Corporation sells natural gas to customers at a fixed commodity rate that is reviewed semi-annually. As part of the Corporation’s natural gas price risk management strategy, derivative instruments are used to manage the price of the natural gas it buys. The objective is to reduce cost of gas variability and to have rates that are competitive to other utilities. The Corporation also purchases and sells natural gas in the open market to generate incremental income through its asset optimization activities. The purchase or sale price of natural gas may be fixed within the contract or referenced to a floating index price. When the price is referenced to a floating index price, natural gas derivative instruments may be used to fix the settlement amount. The types of natural gas derivative instruments that may be used for price risk management include natural gas price swaps, options, swaptions and forward contracts. The Corporation’s commodity price risk management strategy establishes specific hedging targets, which may differ depending on current market conditions, to guide risk management activities. Additionally, the Corporation uses mark-to- market value, value-at-risk and net exposure to monitor natural gas price risk. These metrics are measured and reported daily to the Commodity Risk Management Committee, a subcommittee of the Corporation’s Executive Committee. Based on period-end closing positions, an increase of $1.00 per gigajoule (GJ) in natural gas prices would have increased net income, through an increase in the fair value of natural gas derivative instruments, by $40 million (March 31, 2023 - $183 million). Conversely, a decrease of $1.00 per GJ would have decreased net income, through a decrease in the fair value of natural gas derivative instruments, by $40 million (March 31, 2023 - $183 million).
23
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